Pension fund managers in the US and Europe plan to increase their alternatives allocations from 14 percent to 20 percent over the next three years, according to internal research conducted by Citi Investment Research.
Within alternatives, private equity allocations are projected to increase from 4 percent of total assets to 6.3 percent – making private equity the alternative asset class to which Western pensions commit the greatest amount of capital. Fund managers will target just 4.6 percent for hedge funds and 6 percent for real estate investments.
Citi Investment Research interviewed 50 chief investment officers and pension fund managers in the US and Europe and found that 85 percent said they would increase their allocation to alternative investments over the next three years, while 75 percent said they would increase their target allocation to private equity.
These increases could inject an additional $1.2 trillion (€844 billion) into the alternative asset classes, including $400 billion for private equity.
Pension fund managers’ decisions are driven by the expectation of higher returns from private equity over the next three years. Fifty-three percent of managers expect the asset class to generate returns of between 10 percent and 15 percent. The majority of managers expect public equities, hedge funds, real estate and commodities to return less than 10 percent over the next three years.
Pension plans have been steadily increasing their allocations to alternatives, the most recent, and most dramatic, example being the $112 billion Teacher Retirement System of Texas. At its July meeting, the US pension increased its allocation to alternatives from 5.5 percent to 29 percent, making it the the largest target allocation for alternatives of any US pension plan.